What is Sequestration in Medical Billing?

Medical billing can feel like a maze. Terms like “sequestration” pop up and confuse everyone—patients, doctors, and even billers. So, what is sequestration in medical billing? In short, it’s a 2% cut in Medicare payments to healthcare providers. This reduction comes from a government rule to control spending. It affects doctors, hospitals, and other providers but not patients directly. Let’s break it down step by step so you can understand it clearly.

What Does Sequestration Mean?

Sequestration sounds tricky, but it’s not. It means to set something aside or take it away. In medical billing, the sequestration medical meaning is simple: it’s an automatic reduction in Medicare payments. This started in 2013 under the Budget Control Act of 2011. The U.S. government wanted to shrink the national deficit, so it made these cuts mandatory.

Picture Medicare as a big paycheck for providers. Sequestration snips 2% off that check before it’s sent. It’s not a choice—it’s a rule. Patients don’t pay more, but providers get less. That’s the basics of sequestration medical.

Check Also: What Happens If You Don’t Pay A Medical Bill?

What is Medicare Sequestration?

Medicare sequestration is the specific policy that cuts Medicare payments by 2%. It kicked off on April 1, 2013, and targets claims for services or discharges on or after that date. Here’s the breakdown:

• It applies to the Medicare-approved amount—the agreed payment for a service.
• It happens after patient deductibles and coinsurance are subtracted.
• It reduces only what Medicare pays providers, not what patients owe.

For example, if a provider bills $100 and Medicare approves it, the patient might owe $20 (coinsurance). Medicare would pay $80—except sequestration cuts 2% of that $80 ($1.60). The provider gets $78.40 instead. The patient’s $20 stays the same.

This cut is universal. It hits every Medicare FFS claim, whether it’s for a routine checkup or complex surgery. The goal? To shrink federal spending without raising taxes or rewriting Medicare rules.

Why Does Sequestration Exist?

Sequestration didn’t come out of nowhere. It’s tied to a bigger story about U.S. finances. In 2011, Congress faced a debt ceiling crisis. They passed the Budget Control Act to avoid default, setting strict spending caps. If lawmakers couldn’t agree on targeted cuts, automatic reductions—called sequestration—would trigger instead.

Medicare, a massive chunk of federal spending, got caught in the crosshairs. Lawmakers capped its cut at 2% to avoid gutting healthcare too harshly. Other programs, like defense, faced bigger slashes. The cuts rolled out in 2013 and stuck around because Congress hasn’t found a better fix.

During the COVID-19 pandemic, sequestration paused (May 2020 to March 2022) to ease pressure on providers. But it’s back now, and as of March 13, 2025, the 2% reduction still applies. Advocacy groups keep pushing for relief, but no permanent end is in sight.

How to Calculate Sequestration Reductions in Medical Billing?

Calculating the sequestration amount isn’t rocket science, but it takes a few steps. Here’s how providers figure it out:

1. Find the Medicare-approved amount. This is the base payment before adjustments.
2. Subtract patient responsibility. Deductibles and coinsurance come out first.
3. Apply the 2% cut. Take 2% off what Medicare owes after step two.
4. Get the final payment. That’s what the provider receives.

Detailed Example

• Service cost: $200 (Medicare-approved amount).
• Patient deductible: $50 (already met elsewhere).
• Coinsurance: 20% of $200 = $40.
• Medicare’s share: $200 – $40 = $160.
• Sequestration cut: 2% of $160 = $3.20.
• Final payment to provider: $160 – $3.20 = $156.80.

The patient pays $40, and the provider gets $156.80 instead of $160. That $3.20 difference is the sequestration reduction. For a small practice handling hundreds of claims, these small cuts pile up fast.

Quick Formula

• Medicare payment (after patient share) × 0.02 = Sequestration amount.
• Subtract that from the Medicare payment for the final total.

Check Also: How Is The Coordination Of Benefits Process Best Described?

How Sequestration Impacts Providers

Sequestration in medical billing squeezes healthcare providers’ wallets. A 2% cut might sound minor, but it’s a big deal for those relying on Medicare. Imagine a hospital with $1 million in annual Medicare payments. Sequestration chops off $20,000. For small practices or rural clinics, that could mean skipping a nurse’s salary or delaying new equipment.

Providers can’t pass this cost to patients—Medicare rules forbid it. They’re stuck absorbing the loss. Here’s what that can lead to:

• Budget cuts: Fewer staff, shorter hours, or reduced services.
• Cash flow issues: Smaller margins make it harder to stay afloat.
• Specialty strain: Areas like cardiology, with lots of Medicare patients, feel it more.

At Prime RCM, we’ve seen this firsthand. Specialities like Cardiology Medical Billing Services, with many Medicare patients, feel the pinch more. A smart medical billing company like Prime RCM can help track these cuts and keep cash flowing.

Does Sequestration Affect Patients?

Patients get a free pass here. Medicare sequestration doesn’t raise your deductibles, copays, or coinsurance. It only trims what Medicare pays providers. Your bill stays the same, and you won’t see a line item labeled “sequestration fee.”

But there’s an indirect ripple. If providers lose too much money, they might:

• Limit Medicare patients to balance their books.
• Cut back on services like evening appointments or non-emergency care.
• Raise fees for non-Medicare patients to offset losses.

So, while your wallet’s safe, access to care could shrink over time. It’s a slow burn, not an instant hit.

The Timeline of Sequestration: Pauses and Politics

Sequestration isn’t a straight line. It started April 1, 2013, but hit speed bumps. During COVID-19, Congress paused it to support healthcare:

• May 1, 2020 – March 31, 2022: No cuts.
• April 1 – June 30, 2022: 1% cut (phased return).
• July 1, 2022 – Present: Full 2% cut restored.

As of March 13, 2025, the 2% reduction holds firm. Groups like the American Medical Association (AMA) and American Hospital Association (AHA) lobby to end it, arguing it hurts providers already stretched thin. Congress has flirted with relief bills, but nothing’s passed yet. The future? It depends on budget talks and political will.

How Prime RCM Helps Providers Manage Sequestration?

Medicare tags sequestration cuts with Claim Adjustment Reason Code (CARC) 253. You’ll see “CO 253” on remittance advice, meaning “Sequestration—reduction in federal payment.” It’s a clear signal of the 2% dip.

At Prime RCM, we help providers stay on top of this:

• Spot the cuts: We check claims for CO 253 accuracy.
• Track the impact: We analyze how much revenue sequestration costs you.
• Plan ahead: We tweak budgets and billing to soften the blow.

For example, we might suggest boosting private insurance claims to balance Medicare losses. It’s about staying one step ahead.

Check Also: What is POS 11 in Medical Billing?

Why This Matters to You?

Sequestration medical isn’t just a billing quirk—it shapes healthcare. For patients, it might mean fewer doctors taking Medicare later on. For providers, it’s a revenue challenge to solve. For billers like Prime RCM, it’s a puzzle we tackle daily.

Understanding it helps everyone. Patients can plan for care access. Providers can adjust budgets. And with Prime RCM, you get expert support to navigate it all. It’s not just a 2% cut—it’s a piece of the healthcare puzzle.

FAQs

What’s the Sequestration Amount?
It’s 2% of Medicare’s payment after patient costs are deducted. Always 2%—no wiggle room unless Congress says otherwise.

Is Sequestration Forever?
Not necessarily. It’s ongoing until lawmakers change it. Pauses have happened, so it’s not locked in stone.

Can Providers Skip It?
No way. It’s mandatory for all Medicare FFS claims. No opting out.

Does It Hit Medicare Advantage?
Nope. Only Fee-for-Service claims get the cut—not Medicare Advantage plans.

Final Thoughts from Prime RCM

Sequestration in medical billing is a 2% Medicare payment cut that started in 2013. It’s automatic, mandatory, and affects providers—not patients. From how to calculate sequestration reductions in medical billing to its long-term effects, we’ve covered it all. At Prime RCM, we’re here to make sense of it and keep your practice thriving.

Got questions? Reach out to us. We’re your partner in mastering medical billing—no matter what rules come next.